Options market shows investor jitters as the stock market slips from record highs

Published Tue, Dec 29 20201:27 PM ESTUpdated Tue, Dec 29 20201:32 PM EST

(This story is for CNBC Pro subscribers only.) Signs are piling up in the options market that investors have become increasingly nervous about the stock market's record-setting rally. Just as the major averages refreshed their all-time highs Tuesday morning, traders scooped up hedges against losses particularly in the technology sector. The market quickly rolled over and traded in the negative territory by midday. Investors were buying protection at a time when the market is set to wrap up 2020 with unexpectedly strong gains. As of Tuesday, the S & P 500 is up more than 15% this year. Jon Najarian, CNBC contributor and co-founder of MarketRebellion, said big blocks of Invesco QQQ Trust put options were being bought amid the intraday market reversal. QQQ tracks the Nasdaq 100, which consists of the 100 largest non-financial companies in the Nasdaq Composite. Puts give investors the option to sell at specified prices. "Virtually as we hit those new highs, we had very significant put buying show up on our computers, our algorithms, and it wasn't small, it was huge. It was 14,000 contracts in one strike, and it was 50,000 contracts in another strike," Najarian said on CNBC's "Halftime Report" on Tuesday. "That doesn't say we have to go straight down and it has to be a 10%, 20% correction, but some very big money because these were $5 million to $20 million trades that were going off in a fraction of a second. When that happens, that tells you that people that are running very large sums of money either want protection or they bet we'll roll over," Najarian added. Investors could also be hedging against the risk surrounding the Georgia U.S. Senate runoff elections, which take place on Jan. 5. The event remains a wild card for the market as it has the potential to reshape the course of the economy in the year ahead. Net short This investor anxiety was also on display on trading platform Interactive Brokers. Chairman Thomas Peterffy said a "fantastically unusual" thing has happened in recent days that his customers are net short the market for the first time ever. "Our customers tend to be on the selling side of options, and there is such demand for these out of the money options that our customers tend to become sellers. So they carry a long position in stocks, but they override, in ratios say 4-to-1 or 5-to-1, against the stock. It's usually about Tesla and Amazon and Apple. That's where most of the action seems to be," Peterffy said on CNBC's "Squawk Alley" on Tuesday. "So it's a very interesting situation. It has never happened in our history that our customers as a whole were net short the market, but as of yesterday, that is the case," he added. — CNBC's Jesse Pound contributed reporting.

Traders work on the floor of the New York Stock Exchange.

NYSE

(This story is for CNBC Pro subscribers only.)

Signs are piling up in the options market that investors have become increasingly nervous about the stock market's record-setting rally.

Just as the major averages refreshed their all-time highs Tuesday morning, traders scooped up hedges against losses particularly in the technology sector.

The market quickly rolled over and traded in the negative territory by midday. Investors were buying protection at a time when the market is set to wrap up 2020 with unexpectedly strong gains. As of Tuesday, the S&P 500 is up more than 15% this year.